Australia / Analyst Insights
More milk: Changing consumer demand has led to a new alliance
by Amanda Lem
Apr 17 2018

Consumer trends are adjusting to support healthier lifestyles, which has led to a rise in demand for alternative milk products. In order to meet these demands, Fonterra Co-operative Group Limited (Fonterra) and The a2 Milk Company Limited (a2MC) have formed a partnership. The alliance will leverage each company’s strengths to provide growth opportunities and medium- to long-term benefits for both players.

The partnership is a response to meeting the growing demands for a2MC products in the Australian, US and Chinese markets, and follows a2MC’s strong revenue and profit growth in 2016-17. a2MC’s products are marketed as containing only the A2 beta-casein protein, which is asserted to offer several health benefits such as being easier to digest for people that experience stomach discomfort from consumption of regular cow milk. Milk is regarded as a staple of the Western diet. However, consumers are becoming more health conscious and are increasingly seeking alternative milk products. As such, demand for A1 protein free products is rapidly rising.

Both Fonterra and a2MC will likely significantly benefit from the partnership. In particular, the agreement will enable Fonterra to further diversify their dairy product range to include A1 protein free products and market them using the already recognised premium brand a2­­­­MC has created. Per the agreement, Fonterra will exclusively supply A1 protein free milk powder products to markets in South-East Asia and the Middle East, and will have licence to manufacture and distribute A2-branded milk in New Zealand. In return, a2MC will benefit from Fonterra’s global milk pool, along with the company’s supply chain and production capabilities. This will allow a2MC to boost its market strength, enabling the company to strengthen brand exposure and expand in local and international markets. Both companies are also exploring opportunities to retail A1 protein free butter and cheese, as well as operate a jointly owned packaging facility.

Despite strong competition, Fonterra’s industry-specific revenue is anticipated to increase by 7.0% in 2017-18. This is relatively in line with the Milk and Cream Processing industry’s expected annualised growth of 8.5% over the five years through 2017-18. Both companies are continuously investing in brand awareness and marketing, and both companies are expected to benefit from­­­ efficiencies created by economies of scale through this partnership. As Fonterra already has significant market share in the industry, this alliance with the rapidly growing a2MC is anticipated to further strengthen both companies’ market presence. Higher market share concentration in the industry is likely to deter potential entrants, and will also make it difficult for existing businesses to grow their market share.

 

Related companies:

The a2 Milk Company Limited

Fonterra Co-operative Group Limited